Thinking of becoming self‑employed?
Recent statistics suggest that the number of self‑employed workers in the UK has risen by almost 10% since the start of the recession. However, before becoming self‑employed, there are various issues that you need to consider from a tax perspective.
Here we take a look at some of the tax considerations that apply to someone who becomes self‑employed. Different considerations may apply where a person sets up a business as a partnership or a limited company, so please speak to us for advice.
Registering for self assessment
Registering for self assessment may not be very high on your list of priorities in the early days of starting a business. Yet failure to notify HMRC of your new employment status may attract a penalty if tax or national insurance contributions (NICs) are unpaid as a result.
If you are already registered for self assessment because you needed to complete a self assessment tax return for other purposes, you do not need to register again. However, you will need to complete the self‑employed pages when you compile your tax return.
National insurance contributions
A person who is self‑employed must pay Class 2 and Class 4 NICs. Class 2 contributions are flat rate contributions payable at £2.70 per week for 2013/14.
A person is automatically registered for Class 2 contributions when registering as self‑employed for self assessment purposes. A person who is already registered for self assessment can register for Class 2 national insurance by calling the HMRC helpline. Self‑employed individuals with earnings under £5,725 a year (2013/14) are exempt from paying Class 2 NICs.
Those affected must claim the small earnings exception on form CF10. Paying Class 2 NICs has the advantage of protecting benefit entitlements.
Class 4 NICs are payable with income tax on profits, via the self assessment system. Class 4 national insurance is levied at a rate of 9% on profits between £7,755 and £41,450, and 2% on profits over that amount.
Value Added Tax (VAT)
A person must register for VAT once their turnover in any 12 month period exceeds the VAT registration threshold, which is set at £79,000 from 1 April 2013.
You may wish to register for VAT voluntarily if your turnover is below the VAT registration threshold. This will allow you to recover any input VAT suffered, which can be beneficial, particularly if the VAT incurred exceeds that charged. We can help you to make the right decision and complete the registration process.
Pay As You Earn (PAYE)
If you take on people to work for you, you will need to register as an employer with HMRC.
As an employer you are required to comply with PAYE and NIC regulations, deducting tax and NICs, adding your own employer NICs and paying the total to HMRC, net of certain adjustments. Under the new Real Time Information system, employers must send pay and deduction details to HMRC on or before the time of making a payment to an employee. If you choose to employ someone, you will need RTI‑compliant software, although HMRC’s free Basic PAYE Tools package can be used for businesses with up to nine employees.
Under the Regional Employer NICs ‘holiday’, subject to certain conditions new businesses that start up before 5 September 2013 may qualify for a deduction of up to £5,000 on the employer NICs that would normally be due, for each of the first ten employees they take on.
As a self‑employed business owner, you will need to keep sufficient records to allow you to comply with your tax obligations. We can help – please contact us for information and advice.
Filing a tax return and paying tax
If you are self‑employed you will need to file your self assessment tax return, complete with the self‑employed supplementary pages, and pay any tax due. This should be completed by 31 January after the end of the tax year to which it relates for online returns, or by 31 October for paper returns. You may also need to make payments on…